When technology entrepreneur Martin
Roscheisen was looking for the next big thing in 2001, the Internet wasn't part
of his plans. Instead, he looked to the field of solar photovoltaics (PV),
specifically at work being done by a small, government-funded research company
named Unisun Corp. Roscheisen recruited one of Unisun's main researchers, and in
2002, he and his newly incorporated five-person company, Nanosolar, sought
funding in California's Silicon Valley. The pitch: thin-film solar cells that
could be produced for less, more efficiently, and on a significantly larger
scale than standard solar paneling.
After receiving seed funding from Google
(GOOG) founders Sergey
Brin and Larry Page, Roscheisen shopped the idea around to the venture-capital
community, but was met with skepticism. "They told us that no venture
capitalists had ever invested in this—that this is something GE (GE) should be doing and that we
should speak with them," says Roscheisen.
Four years later, with more
than $50 million in funding from a variety of VCs, and a fast-growing staff of
50, Roscheisen believes Nanosolar is onto the next big thing. His company, whose
ambitious slogan is "A Solar Panel on Every Building," is currently building the
largest thin-film solar-panel factory in the world in California's Bay
Area.
MORE THAN SOLAR. Roscheisen is not
alone in his belief in solar. Last year, three of the five biggest IPOs were in
solar photovoltaics. The industry is projected to grow from an $11.2 billion
business in 2005 to a $51.1 billion business by 2015, according to the 2006
Clean Energy Trends Report by Clean Edge, a clean tech-focused research and
consulting group. VCs put more than $150 million into U.S.-based companies like
Nanosolar in 2005—double the amount of investment from 2004, according to the
report.
The mood among investors, particularly within the venture
community, has undergone a sea change in the past couple of years. Constant
media attention surrounding global warming and hybrid vehicles has brought clean
and green front and center because of its prodigious growth potential (see
BusinessWeek.com, 5/8/06, "Ethanol
Cars You Can Buy Now").
Clean Edge co-founder and principal Ron
Pernick says other green technologies aren't far behind solar. "We're going to
see a lot more in biofuels—ethanol and biodiesel—and also advanced lithium-ion
batteries, as well as systems integration and packaging of these types of
technologies," he says.
MORE THAN ENERGY.
Large-scale venture backing for clean tech is a relatively recent phenomenon. In
1999, clean energy technology made up less than 1% of the total venture capital.
In 2005, it was at 4.2%, or $917 million out of $22 billion—a more than 25%
increase from the previous year, according to the Clean Edge report. All of the
largest venture capital firms have gotten into the act, joining a group of
long-established specialist firms that had been around since the early
1990s.
But for apt entrepreneurs, green growth areas aren't limited to
energy technology. Sales of organic foods are expected to grow 11% annually for
the next four years, according to the Organic Trade Association's 2006
Manufacturer Survey. And the green building industry will grow to $38 billion,
five times what it is today, by 2010, according to the National Association of
Home Builders (see BusinessWeek.com, Summer 2006, "Do You
Need To Be Green?").
So, how can entrepreneurs score the kind of
financial backing that Roscheisen's Nanosolar received? BusinessWeek.com talked
to fund managers at three major venture capital firms, and executives at two
angel investor networks that fund small or early-stage companies to find out
which green technologies they see as entrepreneurial hotspots now, as well as
what are the green growth industries of the future.
Mohr Davidow Ventures
(MDV), which currently manages a $400 million fund with interests in everything
from software and systems companies to clean tech and life sciences, is one of
the large VC firms that funded Nanosolar. MDV has made six investments over the
past several years, three of which they've announced publicly: Nanosolar, Jadoo
Power Systems, and Energy Innovations. The other three remain under
wraps.
"SOLAR FARMS." Erik Straser, a
general partner at the firm, manages the clean tech area for the company. He
says despite the flurry of solar-related activity, there's huge potential still
left in it, since the problem of supply—which cannot keep pace with
demand—hasn't yet been convincingly solved. More technology startups similar to
Nanosolar's are in the works, but Straser says there's still a lot of money to
be made in "solar integration," which includes the delivery, installation, and
storage of energy produced by these systems.
Entrepreneurs can play a
role in all types of solar development, says Straser. Besides improving the
installation technology, "another business angle might be to buy lots of small
installers and create a single large installer that could get better panel
pricing and have other efficiencies of scale," he says, since solar-panel
technology is supposed to become ubiquitous. "There's going to be solar farms at
some point," he predicts. "Instead of growing wheat, the new farmers will grow
energy."
Draper Fisher Jurvetson (DFJ), another large, mainstream venture
capital firm, is dedicated to the clean technology industry. DFJ has been
actively investing for about five years and has done approximately 12 deals.
"We're probably the most active of the traditional venture funds," says Raj
Atluru, DFJ's managing director.
BIOFUEL
BONANZA. What kind of deals is DFJ looking to do in the future? "If
I was an entrepreneur, I'd jump all over the advanced fuel industry," says
Atluru. He says techniques of cellulosic ethanol production, which uses
disposable materials rather than just corn, are being perfected in university
labs. Adds Atluru, "Advanced fuels are where solar was three or four years ago."
He sees huge growth potential and IPOs in the offing.
The research backs
Atluru's claims. The market for biofuels hit $15.7 billion globally in 2005, up
more than 15% from the previous year and is predicted to grow to $52.5 billion
by 2015, according to the Clean Edge 2006 report. Ethanol is a fast-growing
sector, with a number of pending IPOs (see BusinessWeek.com, 6/12/06, "Should
You Bet on Ethanol?"). Alternatives to corn-based ethanol, still
underdeveloped in the U.S., make up a huge potential market, says
Atluru.
Aside from the large venture firms like DFJ and MDV, there is a
group of smaller, more focused funds that are more likely to fund smaller or
earlier-stage projects. The group includes Nth Power, Enertech Capital, and
Chrysalix Energy Management, and has funded clean energy startups for more than
a decade. Nth Power, founded in 1993, focuses on energy and advanced materials
and manages more than $250 million and an active portfolio of more than a dozen
companies.
ENERGY OPPORTUNITIES. Although
Nth Power's main emphasis is energy production, its portfolio extends to other
technologies and advanced materials. "We've funded companies in everything from
sensor and sensor networks to batteries to advanced metering solutions," says
Rodrigo Prudencio, one of the principals of the firm. Prudencio says it's
critical for entrepreneurs interested in green energy technologies to ask:
"Where are the pain points in the energy value chain as they affect oil, gas,
and power companies, or how they affect consumers, and how can technology
develop a business around that opportunity?" Prudencio says there is still great
potential in developing smart metering systems that conserve energy in household
and industrial environments.
But before pounding the pavement for
funding, Prudencio also cautions today's entrepreneurs that not all
opportunities are created equal, and thus, they don't all require large-scale
venture funding. "If I'm in a business where accessing $5 [million] or $10
million will give me access to a $3 billion market, then pursuing venture
capital makes sense. If I'm pursuing a $200 million market, it may make sense to
bootstrap," says Prudencio.
Indeed, venture capital is far from the only
type of funding available to green startups. Angel investors who support small
social ventures are a good source for early-stage green
companies.
Investor's Circle, a 160-member group made up of socially
minded investors, is one such example. Since 1992, Circle members have invested
more than $107 million in 171 deals, ranging from renewable energy and organic
food to health care, education, and media, says Woody Tasch, the CEO and
chairman of the organization. Members team up to gather injections that range
from $250,000 to $500,000 for projects that might be considered too early-stage
or too small for traditional VC backing.
WHAT'S RIPEST
FOR INVESTORS. While many see trouble for smaller entrepreneurs in
the organic food space with Wal-Mart's (WMT) entrance (see
BusinessWeek.com, 3/29/06, "Wal-Mart's
Organic Offensive"), Tasch says he sees growth and opportunity. "I wouldn't
say renewable energy or organics are the easiest way to make money—the big home
runs are still in finding the next Google. But you've got huge, relatively
predictable movements in these sectors, so if you're trying to create long-term
shareholder value and do some real interesting work, this is the place to be,"
says Tasch. He points to organic beef production as one example of a great green
growth business possibility.
Carol Sands, founder and one of the managing
directors of Angels' Forum, a private group of 25 investors who invest in small
corporate and family venture funds that in turn invest in green technologies,
couldn't agree more. Sands points to four common segments that make up the bulk
of green investing possibilities—energy, transportation, water, and other green
sectors. Of the four, Sands says the other sectors, which include energy
management, new sensor technology, agriculture, and chemicals, may be the most
ignored and thus ripest for entrepreneurial innovation. "It's going to be
relatively easy to develop these technologies and isn't going to take a long
time to adapt them—it offers a reasonable time frame with a reasonable rate of
return," says Sands.
Sands says there needs to be more communication
between the entrepreneurial types and lab rats, since there's a glut of great
ideas just waiting to be discovered. "There are a large number of entrepreneurs
who are searching for the next business…to get involved in. My answer to them is
look to clean tech," says Sands.
FERTILE
FIELD. The funding history of Light Engineering, a company
supported by Angels' Forum, illustrates the boom in the industry. In 1998, when
Matt Johnston, Light Engineering's CEO, was looking to fund his fledgling
company, which could challenge traditional industrial manufacturing by producing
cleaner, smaller motors and generators, both VCs and angels expressed little
interest. Seven years later, Johnston says the industry is buzzing. "I gave a
15-minute presentation [on clean energy] just to help out a friend, and I was
approached by about 30 people. It was pretty overwhelming. This is becoming a
big topic again," says Johnston.
That level of interest signals to
Johnston that it's almost time to sell Light Engineering, which he says he plans
to do within two years. But just because some entrepreneurs are beginning to
cash out, that doesn't mean green is anywhere near mature. With more and more
funding possibilities, whether through venture capital, angel investing, or
bootstrapping, opportunities for green entrepreneurs are rich.
Gangemi is a reporter for
BusinessWeek Online in New York
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